Greek bond swap prospects lifted by fresh pledges

Lefteris Papadimas

6 Min Read

ATHENS (Reuters) - Major banks and pension funds threw their weight behind Greece’s bond swap offer to private creditors on Wednesday, making it increasingly likely that the deal will pass and clear the way for a bailout package to avert an immediate default on its debt.

A woman walks inside a hall of the Athens Stock Exchange in Athens January 23, 2012. REUTERS/John Kolesidis

A group of banks and funds representing 40.8 percent of Greece’s 206 billion euros of outstanding debt said they would take part in the deal, joining other Greek and foreign banks and pension funds which have already pledged to accept the offer.

A senior Greek finance ministry official told Reuters the government was now optimistic that well over 75 percent of eligible bonds would be submitted, easily clearing the original minimum threshold it had set for the deal to proceed.

In total, bank, insurers and pension funds holding bonds worth around 120 billion euros have already declared they will take part. Some hedge funds and several Greek pension funds were holding out against the deal.

The European Union and International Monetary Fund have made a successful bond swap a pre-condition for final approval of the 130 billion euro ($170 billion) bailout agreed last month and ministers will decide on whether to clear the package in a conference call on Friday afternoon.

Athens, totally reliant on international support to stave off a default that could set off a severe banking crisis across the euro zone, has asked its private sector creditors to accept steep losses on their Greek bond holdings.

Investors are being asked to give up almost three quarters of the value of their holdings in return for new Greek bonds in a bid to cut a public debt burden that amounts to around 160 percent of Greece’s gross domestic product.

Provided it reaches a two thirds threshold of those who respond to the offer, Athens has said it will impose collective action clauses (CAC) that would allow it to impose the deal on all its bond holders. It has warned that it will pay nothing to investors who refuse to sign up.

“The exchange will go through and probably with the CACs being triggered as well,” said a source in Paris who is close to the deal.

NO CRYSTAL BALL

Amid signs that acceptances had picked up strongly on Wednesday, a string of international banks and insurers, ranging from Germany’s Munich Re to Bank of Cyprus declared they would back the deal.

But after months of tortuous negotiations and repeated setbacks, senior bankers and officials remained cautious ahead of the deadline.

“About the private sector deal - I don’t have a crystal ball. I cannot predict this with certainty. But I repeat, for us, this is a condition,” Dutch Finance Minister Jan Kees de Jager told parliament.

Only 177 billion euros of the debt is covered by Greek law and it was not immediately clear how much of the debt covered by Wednesday’s commitment was under Greek law and how much under international law.

Athens only has the power to enforce losses on holders of bonds written under Greek law, not the 10 percent or so of its debt covered by English or other international law.

It is also still unclear whether enforcing the deal will trigger credit default swaps (CDS) insurance that some investors hold, adding an element of uncertainty over its wider impact.

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JITTERY

Financial markets have become more jittery the closer the Greek bond deadline has approached and worries about the bond swap lifted demand for German bonds on Wednesday, as investors sought a safe haven for their money before the deadline.

Greece, unable to borrow normally on the bond markets, urgently needs the bailout to keep paying its bills while it attempts to make deep structural reforms to its shattered economy, now in the fifth year of deep recession.

Athens, which has annoyed its international partners by repeatedly missing reform targets, must have the funds cleared by March 20, when redemption payments on 14.5 billion euros of bonds fall due.

Greece has staggered from one deadline to another since the crisis blew up in 2010 and even if the bailout is passed, several international partners have said more support will be needed before long and a default may only have been delayed.

After months of some of the harshest austerity measures imposed in western Europe since World War Two and repeated violent protests, Greeks have become increasingly disillusioned ahead of elections expected in late April or early May.

Underlining the problems facing the economy, the head of SETE, the association representing Greece’s vital tourism sector, said pre-bookings from key markets including Germany and the Netherlands were down by 20-30 percent this year.

On Wednesday, prison guards kicked off a series of 24 hour rolling strikes in protest against worsening conditions in the country’s already severely overcrowded prisons. Greeks also booed and threw yogurt at politicians during a parade on the island of Rhodes. ($1 = 0.7625 euros)